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AZ Federal Court Dismisses Fund Distribution Fee Case

In a recent decision by the U.S. District Court for the District of Arizona, the Court dismissed a complaint brought by a mutual fund shareholder against the fund's adviser and distributor.  In the case, Turner v. Davis Select Advisers LP and Davis Distributors LLC, plaintiffs alleged that the adviser and distributor received excessive rule 12b-1 fees (distribution fees) in violation of Section 36(b) of the Investment Company Act of 1940 ("1940 Act"),  the adviser recieved excessive management fees in violation of Section 36(b) of the 1940 Act, and both the adviser and distributor entered into impermissible agreements in violation of Section 47(b) of the 1940 Act.

The Court dismissed all three allegations, with prejudice, on the grounds that, even taking the facts alleged by the plaintiff as true, the the actions alleged did not clearly violate the law.  In the context of the alleged violations of Section 36(b), the Court applied the Gartenberg factors recently reconfirmed by the U.S. Supreme Court in Jones v. Harris Associates.  Under the Gartenberg standard, a plaintiff must allege "that the adviser-manager . . . charge[d] a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." In this case, the court found that the allegations "largely consist of general conclusions, not facts," and did not demonstrate how either fee met this standard.  

This is the second Rule 12b-1 case to be dismissed in the courts in June.  As we discussed in our June 17th entry, Federal Court Dismisses Fund Distribution Fee Case, a New York federal court dismissed plaintiffs' claims in Smith v. Oppenheimer Funds Distributor, Inc., a case involving payments made to broker-dealers by the funds' distributor in accordance with the funds' 12b-1 plan.

The full text of the memorandum opinion in Turner v. Davis Select Advisers LP and Davis Distributors LLC is available at:  http://www.goodwinprocter.com/~/media/E891331144854B44AAF6BA496F3966B3.pdf